Tax date looms for Americans in Canada
Tax season is over for Canadians, but Americans living in Canada – even those with Canadian citizenship – still face complex filing obligations imposed by U.S. authorities.
And it could be a punishing weekend for anyone who has not begun preparing for Monday’s deadline.
“Americans living in Canada are required to file both a Canadian and a U.S. return, and [yet] many of them may be unaware of their obligations,” say tax specialists at H&R Block.
Unless they have gone through the formal process of renouncing their U.S. citizenship, Americans face potentially hefty penalties if they don’t report income and assets to authorities in the United States, even if they’ve already paid sufficient taxes in Canada and therefore don’t owe any in the U.S. Dick Pound, a tax specialist at law firm Stikeman Elliott LLP in Montreal, says there appear to be many who still don’t know about the obligations despite a crackdown by U.S. tax authorities over the past couple of years.
There are estimated to be about one million American citizens, including dual citizens, living in Canada. While most Canadian residents aren’t believed to be the main targets of the U.S. tax crackdown, it would be unwise for anyone to “flout” the reporting and any payment obligations, Mr. Pound said.
“I think if you’re a potential target, you have to pay attention to it,” he said. “They may not go after [you] but they want full compliance.”
The main targets of the U.S. crackdown are believed to be those taking advantage of tax havens as opposed to those paying comparable tax in other jurisdictions such as Canada.
Still, the detailed requirements of the U.S. system, which is based on citizenship rather than residence, are intrusive and complex enough to have spawned a number of books with ominous subtitles, including Smile, The IRS is Watching You.
Mr. Pound, who co-wrote his own book on the subject last year, acknowledges that beginning the process of filing with U.S. authorities can lead to complicated tax issues because the two systems don’t always align.
For example, the sale of a principal residence in Canada is completely tax-free. However, certain taxes arise in the United States if a new home isn’t bought within a prescribed time period.
“The biggest problem for the U.S. citizens that start to file [is] the systems don’t speak to one another,” Mr. Pound said in an interview. The differences can “come back and bite you in the rear end.”
Another example is tax-free savings accounts, which may not be viewed as tax-free by U.S. authorities.
Even simple issues such as whether income earned in Canada is subject to U.S. taxation if taxes have already been paid in Canada can be daunting, tax experts say.
That’s because some foreign income can be excluded, and there are also credits available for taxes paid to ensure the same money isn’t taxed twice.
Owning property creates more complicated tax issues, according to Caroline Battista, a senior tax analyst at H&R Block Canada.